The yield on 10-year gilts has hit a new record low as investors digest a problematic start to the Bank of England’s (BoE) latest quantiative easing (QE) programme.
Having moved below 0.6 per cent for the first time ever yesterday (August 9), 10-year gilt yields dropped a further 3.9 basis points this morning to 0.541 per cent. Two-year gilt yields moved close to negative territory at 0.075 per cent.
Throughout Wednesday (August 10), yields continued to fall with 3 and 4-year paper now offering negative yields for the time since a brief moment immediately after the vote on June 23. Ten-year gilt yields have now fallen 0.8 per cent since then.
The BoE announced on August 4 that it would purchase an additional £60bn of UK government bonds, taking its total stock to £435bn. Part of series of measures aimed at easing credit conditions, the moves were a response to the poor economic data to have emerged since the UK’s vote to leave the EU.
However, the BoE’s plan came unstuck yesterday as insurance companies and pension funds indicated a reluctance to sell bonds in an environment where yield is scarce and pension fund deficits are spiking.
The central bank fell £52m short of its target purchase amount as a result.
The BoE said it would recover from yesterday’s shortfall in the “second half of the current si-month purchase programme”.
Royal London Asset Management head of derivatives Darren Bustin said it was worth nothing new issuance of 39-year gilts next week, which may allow the BoE to make-up for the shortfall.
However, he criticised the central bank for “kicking the can down the road” with its deferred plan as investors await details on the reasons for the failure.
“With plummeting government bond yields and pensions schemes desperate not to increase deficits further, we could well see more bond purchase failures, with low coverage ratios a likelihood for some time.
“As quantitive easing was meant to have been a solution for the problems facing the British economy following Brexit, if this trend continues and monetary policy is unable to achieve its goals then the baton may have to be passed to the Treasury to find a solution,” he said.
